When will I ever learn? An apt musical reference, courtesy of Van Morrison, for the advice profession and all AFSL holders, as news regarding the closure of the Dover AFSL sinks in and up to 400 authorised representatives find themselves in need of licensing within 30 days.

These are difficult times for all involved and many may leave the industry as it morphs to a profession.

The closure should come as no surprise to those within the industry that understand the financial metrics of managing a licence to the current regulatory standards, and no surprise to advice professionals that reside under robust, high quality AFSLs where reputation is sacrosanct. Low-cost licensing is an industry challenge that is on the way out – not on the way in.

What’s surprising is the media supposedly showcasing a number of mid-tiered AFSLs that are now jumping at the opportunity to recruit the orphaned ARs.

This is where the lyric kicks in… The problems haven’t gone away just because the AFSL has. If anything, they are just beginning and the newbie names need to be careful about their own destiny with a watchful regulator overseeing the destiny of the orphans to ensure ongoing suitable supervision and monitoring is achieved in the end.

One of the paraded websites shows low-cost licensing, limited experience in quality of advice, minimal history in adequate supervision and monitoring but lots of cross sell opportunities through property (yes property believe it or not) and previous form with a failed licence history.

How they survive or rebirth is another challenging issue for the regulator but they do survive and they often pose a further threat to consumer distrust in advice – and then we all suffer.

Dover’s plight is intriguing. ASIC has already issued a statement that the closure of the business was a decision by the directors and RMs – that is to say, not an enforced closure by the regulator. However, anyone that watched the unpeeling of the MD at the Royal Commission would agree that the end was nigh and the enforcement subtle but brutal.

What caused the change of heart by Dover? One thought would be that the magnitude of installing adequate processes such as proper AR audits, coupled with the surveillance costs, would have resulted in a massive cost blowout.

The primary cause however is quite simple – the licence holder never charged sufficiently for its services. This incredibly simple issue still remains in the industry for many dealers and requires some careful community engagement because it needs to be addressed by all for the good of the profession.

It’s a delicate issue, as we all need to keep a sensible eye on competition, but if more licensees fail due to inadequate revenue, the advice profession will have related bad media and more room for unsettled clients in the future.

Ironically, ridiculously low fees for licensing attracts the most fee sensitive advisers and many of them require more supervision and monitoring, not less. In other words it increases risk and thereby increases cost, which is a perverse outcome.

Low fee advisers get sucked in to a delusional bubble that licensing is low cost and scalable and somehow they believe it won’t harm their careers or their clients.

The closure of Dover is the ideal opportunity to question this and make a constructive change. The challenge is clear: accept a significant price increase or revert to the past and cross the fingers it doesn’t happen again.

But it will, it’s just a case of when ….and the lyrics burst to life.

Another challenge for the Dover ARs now is that many AFSLs just won’t want to be seen authorising them after the public humiliation of being tagged the licence of last resort in the RC. It just sends all the wrong signals to a licensee’s existing ARs and it’s also hard to believe the regulator won’t want to keep a constructive eye on where they are all going and why. It’s just another distraction risk for the new AFSL.

What are the learnings to reflect on as the dust settles? One is that large IFA networks that grow really quickly often don’t have the internal operational expertise, balance sheet or cash flow needed to match the cost of licensing into the next decade.

This inevitably raises the question of the role of the dealer and takes us back to the interesting debate of self-licensing and self-regulation but in the current environment the profession is not positioned to do so and will not be for many years. Equally the regulator itself is understaffed and not equipped for such a task. It’s a difficult debate.

Which takes us back to another Van Morrison lyric – “There is No Plan B”.

But we need one quickly and it lies in leadership within licensing, leadership at RM level and leadership at adviser association level. We do have the acumen, the people and the opportunity to get through this.

First published: 13 June 2018

Written by Ian Knox. The view expressed are his own.